At MoneyNews: Crimea’s Potential Impact on Gold Prices

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Crimea’s Potential Impact on Gold Prices

By Ed Moy,

Sunday, Crimean voters will decide on whether to secede from the Ukraine and reunify with Russia. While this crisis has helped gold prices rise, there is potentially more room for gold to appreciate.

The outcome of the Crimean vote is all but certain. Both options on the ballot referendum essentially vote “Da” and the result will be based on the majority of those who vote. With Crimea becoming part of the Russian Federation even through a sham democratic process, the secession puts the West in an awkward position.

There are two possible approaches, and both benefit gold prices.

The United States and Europe could allow the secession to stand. It would be uncomfortable for President Obama the lawyer to argue against democracy in action in Crimea unless there is evidence of manipulation. And the European Union will be reluctant to challenge the Crimean outcome because it depends on Russian oil and gas to power its fragile economic recovery.

This will embolden pro-Russian factions in much of the former Soviet Union. Expect more manipulation of democratic processes leading to more countries aligning themselves with Russia. The ultimate goal of Russia is to build a federation to counterbalance the United States and the European Union and to partner with China.

And one of the stated goals of the Russian Federation is to reduce or eliminate its dependence on the U.S. dollar. Evidence of that strategy is Russia’s huge purchases of gold since 2008. Its reserves have surged from 400 tons to just over 1,000 tons in five years. Eventually, their strategy is to have the U.S. dollar lose influence as the world’s reserve currency (which is also China’s strategy).

The second approach is that the United States and Europe could penalize Russia for its alleged role in the secession. Obama has threatened economic sanctions and is leaning on the international community to politically isolate Russia. Because these threats have been so little so late, Germany has had to step up to the plate to provide leadership lacking from the United States. But risk of economic sanctions is that they would hurt U.S. and EU businesses, which would further threaten both economies’ fragile recoveries.

Should the West make good on its threats, Russia already has several counter measures available. To punish Europe, Russia could cut off the European Union’s oil and gas supplies. Further, Russia would likely stop exporting grain to Europe. While hurting Russia’s businesses, that would cause far more damage to the EU economy.

And to punish both the United States and European Union, Russia would likely start dumping their U.S. dollar and euro reserves. Inflation, maybe hyperinflation, might result, which would, in turn, significantly devalue the dollar and euro. The stock markets would tank and respective economies would teeter into recession.

Regardless of what happens in Crimea this weekend, gold prices are likely to be one of the few beneficiaries. Because gold prices typically move in the opposite direction of the value of the U.S. dollar, a falling dollar would likely result in rising prices for gold. A weak response by the West might boost gold prices slowly, while a strong response would boost prices quickly.

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